uhv finc6352 midterm exam 50 questions

• Question 1

The three aspects of cash flows that affect an investment's value consist of the amount of expected cash flows, the timing of the cash flow stream, and the risk of the cash flows. _____

• Question 2

Any change in beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's Price.______

• Question 3

A portfolio of stocks provides average return but much lower risk. The key is the positive correlations among individual stocks. ______

False.

• Question 4

Project selection ambiguity can arise if you rely on the internal rate of return (IRR) instead of the net present value (NPV) when

• Question 5

Which one of the following has the lowest effective annual rate?

• Question 6

Which of the following statements is CORRECT?

• Question 7

For a premium bond, the coupon interest rate should be lower than its yield to maturity. ______

• Question 8

Which of the following statement is most correct?_____

• Question 9

By maximizing the revenue of a firm we cannot ensure that the price per share of common stock is maximized, hence shareholders' wealth might not be maximized._______

• Question 10

When evaluating two independent investments, the NPV approach is a reliable capital budgeting technique without any potential problems.

• Question 11

If the expected annual return is 6.6%, how long will it take to double our money? _______

• Question 12

Which of the following statements about portfolio is true? ______

• Question 13

If we assume a perpetuity pays $100 per year forever. What would the perpetuity be worth if the required rate of return is 5.0%? ______

• Question 14

Which of the following statements about Security Market Line (SML) equation "ri = rRF + (rM - rRF)bi = rRF + (RPM)bi" is NOT true ______

• Question 15

If a stock's expected rate of return is 13% and the required rate of return is 15%, the stock is believed to be ______

• Question 16

If an investor buys enough stocks, he or she can, through diversification, eliminate all of the company-specific risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all market risk. ______

• Question 17

A 10-year corporate bond has an annual coupon payment of 8%. The bond is currently selling at a premium. Which of the following statement is correct? ______

• Question 18

At maturity, the value of either premium bond or discount bond is equal its par value. ______

• Question 19

The preemptive right means common stockholders have the right to purchase any additional shares sold by the firm. It can help current shareholders maintain control of the firm and prevent managers from stealing wealth from the current shareholders. ______

• Question 20

Under what forms of Efficient Market Hypothesis, investors cannot profit via technical analysis? ______

All of the above are correct.

• Question 21

In market equilibrium, stock price is stable. There is no tendency for people to buy versus to sell. The reason is that the expected rate of return is equal to required rate of return in equilibrium and stocks are fairly priced. ______

• Question 22

Junk bonds are high risk, high yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.______

• Question 23

Which of following factors may affect stock price? ______

Selected Answer:

All of above

Answers: Inflation expectations

Risk aversion

Company-specific risk

The change of dividend growth rate g

All of above

• Question 24

For a non-constant dividend growth stock, the capital gain yield of the stock is equal to the dividend growth rate g. ______

• Question 25

Other than dividend growth model, we can employ Market Multiple Analysis method for stock valuation. We suppose a firm's estimated earning per share is $15. The average price to earnings (P/E) ratio for similarly publicly traded firms is 10. What's the firm's expected stock price? ______

• Question 26

Which of the following statements about sinking fund is true? ______

A company would prefer to use sinking fund to call bond if bond sells at a big premium.

• Question 27

You just inherited $20,000. You are investing this money for two years at 5% compounding interest. In whole dollars, how much money will you have at the end of the two years?

• Question 28

What's value of a preferred stock if we assume it has an annual dividend $6 per share and the required rate of return is 3%? ______

• Question 29

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72%; A = 9.64%; AAA = 8.72%; BBB = 10.18%. The differences in rates among these issues were most probably caused primarily by:______

• Question 30

John purchased 100 shares of Google common stock when the company went public through IPO. This transaction occurs in the:

• Question 31

Find the yield to maturity for a 10-year, 9% annual coupon rate, $1,000 par value bond if the bond sells for $958 currently? We assume that the interest is paid on this bond annually. ______

• Question 32

Using the information from Question 31, calculate the bond's current yield.

• Question 33

Using the information from Question 31 and 32, calculate the bond's capital gain yield. ______

• Question 34

A store is offering a ring for sale for 36 months at $120 per month. The retail price of the ring is $3,900. What is the interest rate on this offer?

• Question 35

You want to receive $5,800 per month in retirement. If you can earn 0.8% return per month and you expect to need the income for 30 years, how much do you need to have in your account at

$683,833

• Question 36

What's the future value of the initial $1,000 deposit after 10 years? We assume current interest rate is = 6%, compounded monthly. ______

• Question 37

What's the present value of the $1,000 due in 10 years (FV=$1,000)? We assume current interest rate is 6%, compounded monthly. ______

• Question 38

The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest is paid on this bond every six months. And the nominal annual yield (YTM) is 10%. Given these facts, what's the ANNUAL coupon rate of the bond? ______

• Question 39

A stock has the following probability distribution: If economy is good (the probability is 20%), its expected stock return is 20%; if economy is on average (the probability is 60%), its expected stock return is 10%; if economy is bad (the probability is 20%), its expected return is -20%. Find the expected rate of return for the stock ______

• Question 40

Using the data from Question 39, find the standard deviation (risk) for Hamilton's stock ______

• Question 41

Using the results from Question 39 and 40, compute the ratio of the standard deviation to the expected return for the stock______

• Question 42

An investor is forming a portfolio by investing $50,000 in stock A which has a beta of 1.50, and $50,000 in stock B which has a beta of 0.90. The return on the market is equal to 10% and treasure bonds have a yield of 5% (rRF). What's the portfolio beta? ______

• Question 43

Using the information in Question 42, what's the required rate of return on the investor's portfolio? ______

• Question 44

A company is considering a new inventory system that will cost $120,000. The system is expected to generate positive cash flows over the next four years in the amounts of $35,000 in year 1, $55,000 in year 2, $65,000 in year 3, and $40,000 in year 4. The firm's required rate of return is 9%. What is the payback period of this project? _______

• Question 45

Based on the information from Question 44. What is the net present value (NPV) of the project? _____

• Question 46

Based on the information from Question 44, what is the internal rate of return (IRR) of this project?

• Question 47

Based on the information from Question 44, what is the profitability index (PI) of this project?

• Question 48

A stock is selling for $50 in the market. The company's beta is 1.2, the market risk premium (rM - rF) is 5%, and the risk-free rate is 6%. The most recent dividend paid is D0= $2.0 and dividends are expected to grow at a constant rate g. What's the required rate of return by common shareholders?

• Question 49

Using the information from Question 48, what's the dividend growth rate g for this stock? ______

• Question 50

Using the information from Question 48 and 49, calculate the stock's expected dividend yield. ______